The Affordable Care Act (ACA) has elicited intense national debate and sent biopharmaceutical companies scrambling to understand how their business model, including its ability to innovate, will change as healthcare reform moves forward. Within this uncertain market, what is obvious is that the industry is in the midst of significant transition. Critical drivers of this change are largely macroeconomic; policy is simply accelerating change. Understanding this backdrop is crucial as the biopharmaceutical industry contemplates product innovation within the changing landscape of healthcare in the United States.

The Changing Landscape of US Healthcare
Costs associated with healthcare in the US account for a significant piece of the economic pie. A few key facts: In 2010, the US spent $2.6 trillion on healthcare or an average of $8402 per person; the share of gross domestic product (GDP) devoted to healthcare has increased from 7.2% in 1970 to 17.9% in 2009 and 2010; and healthcare costs per capita have grown on average 2.4 percentage points faster than the GDP since 1970 (1). Despite this spending increase, Americans’ average life expectancy and the efficiency of the US healthcare system are ranked near the bottom of countries with advanced economies (2). These cost increases have a significant effect on individuals, households, and businesses.

The problem is not entirely a healthcare one; it’s a much bigger economic problem. According to a Rand study, increased family contributions to healthcare absorbed almost half of the growth in US before-tax income from 1999 to 2009 (3). Howard Shultz, Starbucks CEO, has been quoted as saying that his company spends more on healthcare than it does on coffee beans. The problem is clear: healthcare spending is affecting the economy of the US and there must be a solution.

The Patient Protection and Affordable Care Act (PPACA), also known as the Affordable Care Act (ACA) or “Obamacare”, has a number of provisions baked in that propose to address cost and efficiency in healthcare. The ACA, for example, includes demonstration and implementation of new payment and care delivery models for Medicare patients (e.g., accountable care organizations [ACOs]), provisions to better coordinate care for people dually eligible for Medicare and Medicaid, reductions in Medicare payments, and new rules (e.g., disclosure and transparency) and new institutions (i.e., exchanges). Despite these attempts at cost-reduction, healthcare expenditure in the US is still projected to increase faster than national income for the foreseeable future (1).

In the pre-healthcare reform environment, drugs and devices were generally priced at a premium based on modest, incremental improvement in features and benefits (i.e., length of drug action). A fundamental belief within the industry has been that premium pricing equals healthcare innovation. Ultimately in today’s cost constrained world, a premium price without demonstrated economic and clinical value is just a cost driver, and cost drivers are being targeted with increasing intensity by payers, providers, and patients. As risk is shifted from payers to provider systems and consumers (patients), the need to show cost-effectiveness of products becomes a core requirement for market access today and in the future.

Impact of Shifting Risk
With the ACA’s endorsement of ACOs, there is a clear emphasis on shifting risk associated with the quality and costs of healthcare to the provider. The focus on the ACO model of coordinated and accountable care is largely based on the belief that rising healthcare costs are, to a large degree, driven by uncoordinated care focused on treating disease rather than on maintaining health. The goals of ACOs are laudable—reduce costs and improve quality of care through coordination among providers. In the current environment, and especially in locations where hospital systems already control significant market share, moving quickly will enable them to lead in creating and controlling ACOs. The result will be that more physicians will likely become employees of systems and have less influence and control over how healthcare is provided.

Another equally significant trend is healthcare consolidation. There has been a spike in the formation and growth of hospital systems and the employment of physicians. In addition, payers are also becoming more involved by creating partnerships with hospitals. Data suggests that the percentage of physicians working in practices owned by a hospital or integrated delivery system increased from 24% in 2004 to 49% in 2011 (4). It’s no surprise that consolidation brings greater purchasing power. The consolidation of hospitals into fewer, larger systems increases the leverage of buyers with all suppliers, including pharmaceutical companies. Beyond that, the integration of insurers with delivery organizations potentially increases the power of administrative perspectives in purchasing decisions relative to clinical perspectives. The likely consequence is accelerated pricing pressure.

With the consolidation of provider organizations and the employment of physicians has come a profound shift in power. Treatment decisions that historically were made at the physician level are being institutionalized, with management’s role growing at the expense of clinicians. Enterprise-level senior executives and hospital administrators increasingly are making decisions about what drugs will be on the formulary, and which will not. Not only have clinicians been forced to share decision making power with management, but administrators are increasingly restricting the access of sales reps to individual physicians. The upside is that biopharmaceutical companies will no longer need as many sales representatives to promote their products. The downside is if they want to educate physicians about the value of their products, manufacturers will need to explore new avenues for doing so.

Even more important is that influencing decisions like what choices go on the formulary will require an entirely new approach to business development that doesn’t begin to resemble physician detailing. Finally, as healthcare systems continue to develop standardized, evidence-based care paths as a means of controlling clinical quality and costs, biopharmaceutical companies must understand the clinical and economic data these decision makers value and how this information can be communicated to them in an effective manner. In a world of new payment models and changing reimbursement values, demonstrated economic and clinical value is becoming paramount.

Industry Innovation
Payers are already demanding data from manufacturers that demonstrates a product’s economic and clinical value in directing reimbursement decisions. Moving forward, hospital administrators with decision-making power will rely on published evidence as well as the experience of their clinical teams to determine a product’s value. To this end, clinical studies must continue to become more comparative by design, not just to the “gold standard” treatment, but also to non-pharmaceutical comparators and watchful waiting.

Similarly, while randomized controlled trials (RCTs) are still essential for regulatory approval and market entry, payers and healthcare administrators are becoming more focused on measuring outcomes in the broader population. Biopharmaceutical manufacturers will need to place greater emphasis on post-market surveillance studies and real world data to ensure their product’s claims of effectiveness are being met. If biopharmaceutical manufacturers fail to plan for and conduct this research, be assured that decision-makers will gather the evidence to determine how competitive products at different price points actually compare. Today, true innovation (things that make healthcare better and cheaper) that addresses broader stakeholder requirements is able to command premium pricing, but marginal improvements focused on incremental features and benefits are suffering.

As healthcare consolidation continues, payers and delivery institution management increasingly share the physician’s once exclusive role in treatment decisions. With cost as a significant driver, for example, payers and provider systems already place pressure on physicians to use generics. In fact, this pressure is built into computerized physician order entry (CPOE) systems, making branded drugs an exception requiring additional justification. Clear differentiation in terms of clinical outcomes and economic value will be a primary way for manufacturers to take on this issue.

Within this context, the concept of bundled pricing is gaining momentum as a reimbursement model designed to address demands for better health outcomes at lower cost. Promising to deliver a standardized set of services for a fixed price with specific quality commitments will create incentives—lacking in the current fee-for-service payment system—for providers to align their efforts to contain underlying costs. Providers adopting bundled pricing must focus on evidence-based care paths that allow them to define the crucial actions, decision points, and products used in treatment. When optimally formulated, such care paths will provide the much-needed link between clinical activities and associated costs. They offer a tool that hospitals can use to gain control of their core production process, using data to collaboratively lower costs and improve outcomes. Being unable to produce a compelling economic and clinical value narrative may set the stage for a product being left out of a provider’s care path, and that will have a significant impact on market access.

Keys to Success
There is still an urgent need to innovate. With the decision maker (stakeholder) set expanding and the criteria for purchasing and defining innovation changing, business model change is required for success. The reality of the new world is that resistance to new products by decision makers is increasing while access and physician influence decline. Healthcare providers (and payers) are focused on the cost and quality of the care they provide and are increasingly risk-averse about new technology and products. Overall, this scenario does not augur well for innovation and, in fact, suggests the need for change in what products are developed and how they are commercialized.

To be successful in this new environment, biopharmaceutical companies must adopt business strategies that consider the interests of all key stakeholders who can influence medical plan design, treatment, and other related decisions. This includes physicians, patients, payers, and policymakers. Every functional team within an organization, from business development and R&D to market access, pricing and reimbursement, has a role to play in making sure the company is set for success in this evolving environment:

• The business development department will need to broaden the competitive set as they look at potential opportunities. More than ever, they will need to make sure that prospective assets address unmet needs, and offer meaningful differentiation that is sustainable over the product’s lifecycle.
• R&D will need to determine the requirements for clinical differentiation and build studies to incorporate these data points, based on identification of what’s really important to stakeholders.
• Sales and marketing departments will have to develop messages, including economic messages, targeted to the specific needs of stakeholders. They’ll also need a broader group of strategic marketing capabilities as they interface in new ways with a broader group of internal and external constituents.
• Quality and regulatory functions will need to be prepared to meet new hurdles both before products get approved and once they’re in the market. With an increasing emphasis on post-market safety surveillance and real-world evidence, companies must have the appropriate measures put in place to capture this information.
• Clinical groups will need to broaden their approach to collecting data and how they look at research design. They’ll need to work closely with health economics, market access, and managed market teams. As observational and non-traditional studies play a more prominent role in defining what the specific comparators should be, companies will need to look at how they use in-market data to influence new study design and provide insights to guide future product development.
• Market access teams will become increasingly important as they’re called upon to translate the implications of what’s happening in the external environment for their internal partners. They’ll need to take on a more strategic role as they interpret market dynamics and sort out where new thinking needs to be integrated within their current structure.
• Pricing and reimbursement teams will need to clearly demonstrate how they established their price, specifically the comparators used, the data that supports it, and the particular patient population that will benefit from their product.

Specific strategies that may be used include:

• Develop “service wraps” around products/portfolios that provide more complete solutions across the continuum of care.
• Create strategic sales teams directed at evolving healthcare delivery models (ACOs, bundled pricing, population health) and payers. Ensure this new sales team is capable of strategic conversations and joint problem solving (versus feature and benefit discussions).
• Consider developing at-risk payment models with employers and payers based on achieving a certain outcome.
• Ensure the early development of a strong economic and clinical value message relevant to all stakeholders for all new products.
• Ensure that the comparative value proposition for a new product is as clear as possible.
• Consider alternative clinical data sources in addition to RCTs such as post-market longitudinal studies, patient reported outcomes, and other sources of real world evidence.
• Generate evidence that delivers the net benefit of biopharmaceuticals in the broadest “real world” context (i.e., clinical, economic, quality of life, and productivity measures) in addition to generating evidence that satisfies the needs of regulatory agencies.
• Invest in targeted therapeutics/personalized medicine based on biomarkers with the goal of drug-diagnostic companions with the ability to demonstrate high value in small subsets of the population.

The New RealityThe implications for the industry are clear: incremental innovations will be closely scrutinized. Unless there is clearly demonstrated value, new products are unlikely to command premium pricing. As “generics as standard-of-care” firmly settles in, biopharmaceutical companies will need a higher degree of clinical and economic differentiation to be successful. In today’s market, differentiation is more important than ever. Key stakeholders include payers, large employers, and increasingly, patients who care about health outcomes and affordability. In addition, it’s wise to remember that it’s a much more transparent marketplace. Government agencies are funding cost-effectiveness studies; payers and large providers are investing in health technology assessments and forming alliances to analyze real world data; and most information is available on the Internet.

This new reality has a number of implications for innovation in biopharma companies, most of which point to the need to produce cost-effective, tangible health improvements. The business reality is that close to 11% of the US healthcare spend is on branded pharmaceuticals (5). However, the perception is that it’s drug prices that are driving healthcare costs. If generics were good before, they are even better now with multiple players in the decision-making process, including patients facing escalating co-pays and deductibles. The incentive is to select a generic over branded unless there is clear and compelling economic and clinical value.

Despite these challenges, manufacturers must continue to innovate; significant unmet medical needs remain. Changes already taking place in healthcare are resulting in market access challenges for new technologies that, in turn, can be expected to impact innovation investment decisions. The exact magnitude of the impact remains hard to predict.